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The Age of the Entrepreneur: Demographics and Entrepreneurship

The Age of the Entrepreneur: Demographics and Entrepreneurship

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This paper looks at how age-related demographic changes in the United States will affect entrepreneurship and recommends possible policy responses.

Demographics is one of the most important factors affecting entrepreneurship, job creation, and innovation. Demographic change shapes all issues that occupy most economic discussions — education, employment policy, taxes, technological changes, and more. Demographic analysis anticipates future trends, helping decision makers to prepare policy interventions accordingly.

The United States will undoubtedly have an aging population over the next few decades. The median age is rising, more people are elderly and the fertility rate is falling. The old age dependency ratio will soon begin rising.

One might expect that an aging population means less entrepreneurship and new business creation. Older individuals (over age 55) tend not to become new entrepreneurs, aside from self-employment. Older individuals are presumed to have lower levels of risk tolerance and higher opportunity costs.

But, contrary to these expectations, there can be reasons to expect that entrepreneurship will not decrease. It may even increase:

• From now until 2030, the absolute number of americans in their 30s-40s will be bigger than ever before. Empirical research highlights this as a “peak age” for entrepreneurship.
• Continued immigration will mitigate general aging. Immigrants have higher rates of business creation, including innovative, high-growth companies. Immigrants have higher fertility rates, too.
• The aging population and other demographic trends present enormous entrepreneurial opportunities in sectors such as health, medicine, education, construction, finance, and transportation.

Demographic trends predict the future population with good certainty — at least over two or three decades. But demography is not necessarily destiny.

The United States can respond to prospective demographic trends with several policies to reap an entrepreneurial boon:

• Identify and lower barriers for entrepreneurial entry
• Ensure labor market flexibility.
• Ensure smooth and certain paths of entry for immigrants.
• Connect younger and older entrepreneurs through programs and networks of various kinds.
• Provide new financing options for entrepreneurs
• Address issues of intergenerational inequality that may confront younger entrepreneurs
This paper looks at how age-related demographic changes in the United States will affect entrepreneurship and recommends possible policy responses.

Demographics is one of the most important factors affecting entrepreneurship, job creation, and innovation. Demographic change shapes all issues that occupy most economic discussions — education, employment policy, taxes, technological changes, and more. Demographic analysis anticipates future trends, helping decision makers to prepare policy interventions accordingly.

The United States will undoubtedly have an aging population over the next few decades. The median age is rising, more people are elderly and the fertility rate is falling. The old age dependency ratio will soon begin rising.

One might expect that an aging population means less entrepreneurship and new business creation. Older individuals (over age 55) tend not to become new entrepreneurs, aside from self-employment. Older individuals are presumed to have lower levels of risk tolerance and higher opportunity costs.

But, contrary to these expectations, there can be reasons to expect that entrepreneurship will not decrease. It may even increase:

• From now until 2030, the absolute number of americans in their 30s-40s will be bigger than ever before. Empirical research highlights this as a “peak age” for entrepreneurship.
• Continued immigration will mitigate general aging. Immigrants have higher rates of business creation, including innovative, high-growth companies. Immigrants have higher fertility rates, too.
• The aging population and other demographic trends present enormous entrepreneurial opportunities in sectors such as health, medicine, education, construction, finance, and transportation.

Demographic trends predict the future population with good certainty — at least over two or three decades. But demography is not necessarily destiny.

The United States can respond to prospective demographic trends with several policies to reap an entrepreneurial boon:

• Identify and lower barriers for entrepreneurial entry
• Ensure labor market flexibility.
• Ensure smooth and certain paths of entry for immigrants.
• Connect younger and older entrepreneurs through programs and networks of various kinds.
• Provide new financing options for entrepreneurs
• Address issues of intergenerational inequality that may confront younger entrepreneurs

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Published by: The Ewing Marion Kauffman Foundation on Feb 10, 2014
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i4j Summit March 2013Dane Stangler, with Dan Spulber: Demographics and Entrepreneurship
The Age of the Entrepreneur: Demographics andEntrepreneurship
Dane Stangler, Ewing Marion Kauffman Foundation,with contributions from Daniel F. Spulber, Northwestern University
This paper looks at how age-related demographic changes in the United States will affect  entrepreneurship and recommends possible policy responses.Demographics is one of the most important factors affecting entrepreneurship, job creation, and  innovation. Demographic change shapes all issues that occupy most economic discussions  education, employment policy, taxes, technological changes, and more. Demographic analysis anticipates future trends, helping decision makers to prepare policy interventions accordingly.The United States will undoubtedly have an aging population over the next few decades. The median age is rising, more people are elderly and the fertility rate is falling. The old age dependency  ratio will soon begin rising.One might expect that an aging population means less entrepreneurship and new business creation. Older individuals (over age 55) tend not to become new entrepreneurs, aside from self-employment. Older individuals are presumed to have lower levels of risk tolerance and higher  opportunity costs.But, contrary to these expectations, there can be reasons to expect that entrepreneurship will not  decrease. It may even increase:
 From now until 2030, the absolute number of americans in their 30s-40s will be bigger than ever before. Empirical research highlights this as a “peak age” for entrepreneurship.
 Continued immigration will mitigate general aging. Immigrants have higher rates of  business creation, including innovative, high-growth companies. Immigrants have higher  fertility rates, too.
 The aging population and other demographic trends present enormous entrepreneurial  opportunities in sectors such as health, medicine, education, construction, finance, and  transportation.Demographic trends predict the future population with good certainty — at least over two or three decades. But demography is not necessarily destiny.The United States can respond to prospective demographic trends with several policies to reap an entrepreneurial boon:
 Identify and lower barriers for entrepreneurial entry 
 Ensure labor market flexibility.
 Ensure smooth and certain paths of entry for immigrants.
 Connect younger and older entrepreneurs through programs and networks of various kinds.
IIIJ Innovation and Communication, Menlo Park, USAiiij.org1
 
i4j Summit March 2013Dane Stangler, with Dan Spulber: Demographics and Entrepreneurship
 Provide new financing options for entrepreneurs
 Address issues of intergenerational inequality that may confront younger entrepreneurs
Table of Contents
1. Introduction: What Will Changing Demographics Mean For Entrepreneurship?2. Trends in Entrepreneurship and Demographics3. Reasons Why Entrepreneurship Will Increase4. Reasons Why Entrepreneurship Will Fall5. So What Can be Done?6. Conclusion Appendix
1. Introduction: What Will Changing Demographics Mean For  Entrepreneurship?
Entrepreneurship contributes fundamentally to economic growth. It is well established that net new  job creation comes primarily from young and growing companies. Innovation, too, depends heavily on entrepreneurial firms. Entrepreneurs not only solve many problems facing society—they also discover those problems in the first place. Given this importance, it is no surprise that reams of  
1
research have been devoted to understanding the phenomenon of entrepreneurship—why do people become entrepreneurs? How can we encourage more of them?Understandably, much of this work looks at personal characteristics of entrepreneurs, the influence of public policy, or other micro-level issues. In this paper, we investigate the relationship of  entrepreneurship and demographics, and what demographic trends—particularly age-related demographics—might mean for the future of entrepreneurship. Our approach looks at demographic effects on entrepreneurship with aid from the lens of life-cycle theory. We combine this with the 
2
latest data on entrepreneurship and demographic trends. Our focus is the United States, partly because of the detailed availability of data, but also because many other countries face simila trends.Our principal finding is that despite nearly universal pessimism regarding the effect of demographic change on entrepreneurship, there are very good reasons for being optimistic.Demographic analysis has obvious limitations not only are long-term population projections speculative, behavioral responses to demographic trends generally depend on economic incentives.Demographics is destiny in the sense that population age distribution is set decades before 
1
 William J. Baumol, Robert E. Litan, and Carl Schramm,
Good Capitalism, Bad Capitalism
 (Yale, 2007);Robert E. Litan and Carl Schramm,
 Better Capitalism
 (Yale, 2012); Harold Evans,
They Made America
 (Back Bay, 2004); Joel Mokyr,
The Lever of Riches
 (Oxford, 1992).
2
 
See Appendix. The basic framework is developed in Daniel F. Spulber, 2013,
The Innovative Entrepreneur 
,forthcoming.
IIIJ Innovation and Communication, Menlo Park, USAiiij.org2
 
i4j Summit March 2013Dane Stangler, with Dan Spulber: Demographics and Entrepreneurship
its effects occur. But the economic response is typically more adaptive than demographic determinism would suggest.
3
The effects of age on entrepreneurship are likely to change in response to economic incentives, which in turn will be affected by the age distribution of the population and other demographic effects. Nevertheless, demographic analysis has the advantage of identifying population trends that may affect individual decision making in the short- and medium-term future. Today’s fertility rate will have an effect for the next two or three decades, as will trends in aging and life expectancy. Demographics help set a country’s social and economic tempo and shape other developments: “Few things influence a population more than its age structure.”
4
General population aging is one of the most noteworthy demographic trends in America today. The first cohort of the baby boomers turned 65 in 2011, and the last baby boom cohort will turn 65 in 2029. Together with a low fertility rate, this means the general age structure of the United States is shifting—the population pyramid is becoming more of a rectangle. At the same time, that mass entry of people into their older years will likely live longer than any other cohort in American history. For most of the past few hundred years, gains in life expectancy came from combating mortality of  children under five years old. In recent decades, such gains have come from extending life at older  ages. One consequence of these changes is that the working age population as a share of total population, which was relatively stable from 1980 to 2010, will decline over the next two decades. Articles and books are full of anxiety over these trends. In a forthcoming book, Jonathan Last says forget every other “cliff” the media identifies: “What America really faces is a demographic cliff.” We 
5
will not be able to support ourselves, keep our government solvent (because of the cost of Social Security and Medicare), or defend the country. The United States, in this line of argument, is “declining in the most important sense—demographically.”We do not discount these concerns—a historically unprecedented demographic shift clearly will have far-reaching consequences. Adaptation will be required. In some ways, of course, the United 
6
States is just emerging from a somewhat demographically unique period. Nothing like the baby boom of 1946 to 1964 had occurred in American history before; when baby boomers began entering the labor force en masse in the mid-1960s, they drove a steady rise in the size of the labor force. This helps explain the stability of the working-age population since 1980. This effect was accompanied by rising labor force participation by women and a falling dependency ratio (the number of children and elderly as a share of the working-age population). Meanwhile, immigration 
3
 
 Nicole Maestas and Julie Zissimopoulos, “How Longer Work Lives Ease the Crunch of PopulationAging,”
 Journal of Economic Perspectives,
Vol. 24, No.1, Winter 2010.
4
 S. Jay Olshansky et al, “Aging in America in the Twenty-first Century: Demographic Forecasts from theMacArthur Foundation Research Network on an Aging Society,”
The Milbank Quarterly
, vol. 87, No. 4,2009 at: http://www.politico.com/pdf/PPM41_agingsociety_pdf.pdf .
5
 
Jonathan V. Last, “America’s Baby Bust,”
Wall Street Journal 
, February 2-3, 2012, at:http://online.wsj.com/article/SB10001424127887323375204578270053387770718.html.
6
 
“The fundamental conclusion of our study is that, barring a significant increase in labor force participation, population aging will lead to a reduction in per capita consumption.” Louise Sheiner, Daniel Sichel, andLawrence Slifman, “A Primer on the Macroeconomic Implications of Population Aging,” Finance andEconomics Discussion Series, Divisions of Research & Statistics and Monetary Affairs, Federal ReserveBoard, 2007.
IIIJ Innovation and Communication, Menlo Park, USAiiij.org3

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